Annaly Down 3.7% Following Earnings Miss

By Michael Aneiro

Some more downbeat news for mortgage real-estate investment trusts, as shares of bellwether mortgage REIT Annaly Capital Management (NLY) are down 3.7% Thursday morning to $11.40 after Annaly late Wednesday reported first-quarter core earnings of $239.7 million, $0.23 earnings per share, short of Street estimates of $0.27 per share, along with a GAAP net loss of $203 million, or $0.23 per share. Book value per share rose to $12.30 as of March 31, up from $12.13 at the end of the previous quarter but down significantly from $15.19 a year earlier.

“We remain optimistic about the investment landscape in light of the market’s reaction to the Federal Reserve’s ongoing reduction of bond purchases,” said Wellington Denahan, Annaly chairman and CEO, in a statement. “We continue to be flexible with our capital deployment and feel comfortable in our ability to sustain attractive risk-adjusted returns in the quarters ahead.”

Here’s Daniel Altscher of FBR Capital Markets with his take:

The primary driver of the miss was significant net interest spread compression to 90 basis points, lower than our 115 basis point forecast and well below last quarter’s 143 basis points. The QOQ change does not bother us as 4Q13 benefited from significant gains on lower premium amortization, while this quarter saw a more normalized level that was reflected in our forecast. However, an increase in hedge exposure drove the economic cost of financing up, well above our forecast, thus driving the miss. Book value came in at $12.30, up only 1.0% QOQ from $12.13, and was below our $12.77 forecast, which would have represented a 5.2% QOQ increase.

While book value for all mREITs this quarter has generally come in shy of our expectations, this result is different in our opinion, because it reflects the fact that Annaly did not actually shrink the agency portfolio (thus missing out on upside as agency MBS rallied during the quarter), but rather it put on incremental swap exposure and thus likely did not benefit as much as expected due to increased hedges. Annaly also increased leverage to 5.2x, up from 5.0x, which was not unexpected, given management last talked about seeing opportunities to start re-levering the balance sheet after taking significant deleveraging action last year, combined with less fear around interest rate sensitivity. We reiterate our Market Perform rating on Annaly as the shares now trade at approximately 0.96x book value, though we think the stock could potentially give back some year-to-date gains as both lower-than-expected book value and the EPS will likely disappoint the market.

Here are Nomura analysts Bill Carcache and Tulu Yunus:

Overall, the earnings results this quarter were disappointing. Spreads narrowed significantly more than us and consensus had expected. Book value was a bright spot this quarter, although the upward move was relatively modest relative to peers (+1% QoQ compared to +5% / +2% at CYS / AGNC). On Thursday’s 10AM conference call, we’ll be looking for management’s perspective on (1) the sustainability of this quarter’s interest yield (assuming no movement in CPRs) and the implications for the current dividend, (2) management’s view on additional use of interest rate swaps, and (3) management’s outlook on the MBS market, particularly as the Fed taper winds down.

Annaly shares had been on the rise for the past month, hitting $11.84 yesterday after closing at $10.85 on April 3.,

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There are 2 comments

MAY 8, 2014 3:22 P.M.

jc wrote:

what does all this mean to future dividends?

MAY 9, 2014 11:46 A.M.

honkj wrote:

seriously.... why are Barron's writers always a month behind when reporting on structured articles that required research? (the research consisting of copying some articles from a month earlier)

and even when it is an earnings announcement, an article comes out a day later? and worse, saying the stock is down such and such a percent, when in fact it is up from after the earnings were announced.... A DAY LATER....

how anyone uses Barrons for any sort of actual investing knowledge has really got to stretch to make anything worthwhile.